Tuesday, September 18, 2012

Cheaper Student Loans. Who Knew?

In his speech at the Democratic convention, former President Bill Clinton heaped praise upon a program that the Obama administration started to help people repay their student loans. Known as “income-based repayment,” it lets borrowers adjust monthly payments down to 15 percent of their income and wipe out the debt after 15 years. “No one will ever have to drop out of college again for fear they can’t repay their debt,” Clinton said. “If someone wants to take a job with a modest income—a teacher, a police officer, if they want to be a small-town doctor in a little rural area—they won’t have to turn those jobs down because they don’t pay enough to repay the debt. Their debt obligation will be determined by their salary. This will change the future for young Americans.”

It’s notable that Clinton talked about how many people the program would help in the future. It’s actually been around since 2009. So far it hasn’t worked as well as policy makers had hoped.
Right now only 972,000 graduates—about 2.6 percent of all borrowers—are using income-based repayment. Two to three million further borrowers could qualify for the program, says Mark Kantrowitz, publisher of FinAid.org, who crunched U.S. Department of Education and U.S. Census data to devise his estimate.

Why would so many graduates with the option of paying less every month not take it?
For one thing, a lot of borrowers don’t know they qualify. To get into the program, you have to apply through the bank that services your loan, but many banks don’t tell borrowers about the program. They aren’t required to do so, and because they make more money if monthly payments are higher, they have little incentive to spread the word. Also, while companies that service direct federal loans—those in which the government is the lender—must offer income-based repayment, servicers of federally guaranteed loans issued by private lenders don’t have to offer the program.
It also didn’t help that in the program’s first six months, there were so many filing glitches that many borrowers were turned off, Kantrowitz says.

The Obama administration is now trying harder to get people into income-based repayment. By the end of this year, officials plan to move the income threshold down from 15 percent to 10 percent for some borrowers, which will make the program available to more people. (If you make $60,000 a year and your loan payments are $600 a month—or about 12 percent—you’ll be eligible and could then decrease your payments to $500 a month.) Banks will be required to describe the program to borrowers who call up and say they’re having trouble paying. The idea is to get people enrolled before they become delinquent.

There’s a further, psychological reason why students might not be taking advantage of the program, Kantrowitz says. Those already in default may have accrued fees and other penalties they feel are unfair. Enrolling in income-based repayment means accepting all the debt, even if borrowers don’t think they owe every last cent. In other words, the program’s existence may be contributing to the very situation the government is trying to avoid—borrowers simply brushing off payments altogether.